Tuesday, May 8, 2007

Rate decisions poised to squeeze dollar

By Richard Beales in New York Mon May 7, 12:56 PM ET

The dollar slipped against leading currencies yesterday as traders looked ahead to three central bank interest rate decisions due on Wednesday and Thursday.

The euro took a modest boost from the victory of market-friendly Nicolas Sarkozy in the French presidential elections, analysts said.

With a London holiday contributing to subdued activity, most traders were focused on this week's central bank meetings. US, UK and eurozone rate decisions are expected to deliver a combination of news that is negative for the dollar, already softer after a below-par US jobs report on Friday.

"The softness of US employment data has spurred some talk that the [Federal Open Market Committee] will acknowledge the economic slowdown in more concrete terms and again soften its risk assessment," said Marc Chandler, global head of currency strategy at Brown Brothers Harriman.

The FOMC meets on Wednesday and is expected to keep the overnight Fed funds rate steady at 5.25 per cent.

Any hint that the Federal Reserve is becoming more worried about decelerating growth, or less concerned about persistent inflation, is likely to weigh on the dollar.

In Europe, the stronger economic growth picture and potentially rising interest rates could lift sterling and the euro against the dollar. The Bank of England is widely expected to lift UK rates by a quarter point to 5.5 per cent on Thursday.

On the same day, most analysts expect the European Central Bank to foreshadow a June rate rise while leaving rates unchanged at 3.75 per cent.

"Note that the ECB is comfortable with a strengthening euro to the extent that it helps combat inflation as long as it poses no challenges for exporters," said Ashraf Laidi, chief foreign exchange analyst at CMC Markets.

The euro rose 0.2 per cent against the dollar to $1.3618 by late morning in New York, still short of the all-time high of about $1.3680.

At $1.9952, the pound was less than 0.2 per cent higher compared with Friday's close. The yen strengthened more than 0.2 per cent to trade at Y119.90 to the dollar.

Commodity-based currencies were among Monday's biggest gainers, with the Australian dollar, South African rand and Canadian dollar all outperforming.

The loonie, the Canadian currency, was nearly 0.5 per cent up on the dollar at $1.1027. The currency has gained about 7 per cent in the past three months.

The strength stems from the commodity-driven economy and a shift in thinking on Canadian interest rates, according to Alan Ruskin, chief international strategist at RBS Greenwich Capital.

"The market was thinking about rate cuts, but now it has started to toy with the idea of rate hikes," he said.

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